Rural Coops' Bond Offering Sells Quickly

By William H. JonesBy William H. JonesNovember 11, 1977

Investors across the nation this week snapped up all of a unique $109 million bond offering for eight electric cooperatives.

A little known but rapidly growing non-profit corporation based here, the National Rural Utilities Cooperative Finance Corp. (CFC), sold the pollution control revenue bonds through a national syndicate headed by Kuhn Loeb & Co., and Paine, Webber, Jackson & Curtis. Inc.

According to Jerome S. Katzin, managing director of Kuhn Loeb, it was the first time a Wall Street offering had been arranged for eight separate new issues under one umbrella. It also was CFC's first pollution control bond offering.

Reflecting the broad scope of CFC's operations, designed to develop independent loan funds for the country's rural electric systems, this week's bond sale raised money for cooperatives in Arizona, Iowa, Arkansas and Mississippi.

CFC provided unconditional guarantees for the tax exempt financings of pollution control facilities in the various towns and counties involved, in amounts that ranged from under $2 million to $46 million. The pollution equipment will be constructed by the rural utilities in connection with electric generating plants.

The bonds, rated A-plus by Standard & Poor's and Moody's and AA by Fitch Investors Service, consisted of $58 million in 30-year bonds (offered at 6 1/3 per cent) and the balance in serials from 1980 to 1997 (offered at rates ranging from 4.25 per cent to 5.90 per cent).

According to the CFC's chief executive, Gov. J. K. Smith, the unprecedented combined offering permitted otherwise small cooperatives to show muscle on Wall Street in a sale of significant size - and to thus benefit from lower interest rates.

The cost of borrowing for the seven participating cooperatives this week was 6.28 per cent. If the money had been raised through the Federal Financing Bank, the most likely source of funds outside private capital markets, the borrowing cost would have been 7.98 per cent on the date of sale.

Based on the success of the initial venture, CFC officials said they expect another such offering of $200 million for five member systems, either late this year or early in 1978.

CFC itself is one of the most unusual enterprises based in Washington. Established in 1969, CFC has grown into a billion-dollar business.

The corporation's main function is to provide money for rural cooperatives. In this role, CFC's lending activities supplement loan programs of the Agriculture Department's Rural Electrification Administration.

But CFC is not a government operation. Its membership includes 840 cooperatively owned rural electric systems and 48 state or regional cooperative groups, which are owned by the local customers. The local cooperatives involved provide power to some 6 million consumers in rural areas and small towns of 46 states - and their rate of electricity consumption has been growing more rapidly than that of investor-owned utilities which serve the rest of America.

Like power companies owned by stockholders, the cooperatives face [WORD ILLEGIBLE] expenses in the future to construct new generating plants. In some nstances, the cooperatives are participating in power plant construction and in the electricity output with investor-owned firms.

While the largest cooperative, in Florida, serves 55,000 customers and the smallest, in Iowa, serve 153, the average cooperative has 8,000 consumers, 44 employees and annual revenues of $3 million. The average cooperative provides power over 1,750 miles of line (4.2 consumers per mile) and 90 per cent of its business comes from residential (home and farm) consumption.

Annual meetings of these cooperatives are big events in the local communities and customers read their own meters - eliminating the costly process by which investor-owned utilities much monitor consumption by sending out their own employees.

Smith, formerly general manager of the Kentucky Association of Rural Electroc Cooperatives, supervises the corporation with policy established by a 22-member board - two from each of 11 geographic districts in the U.S.

CFC makes long-term secured loans for construction, normally for 35 years in conjunction with REA loans; intermediate-loans for up to five years, for initial financing of facilities; lines of credit, providing short-term loans to meet daily cash flow needs; a "weatherization" loan program, providing funds that cooperatives can relend to consumers to install insulation control financing.

Among other services, CFC offers commercial paper, providing daily sources of short-term investment for member cooperative funds; seminars on credit management and cash utilization; assessments of members' costs and financial performance; and a series of bonds for member systems, their employees and consumers.

In the year ended last May 31, CFC loan commitments to member systems totaled $1.83 billion, up 83 per cent over the prior year. Loans outstanding on May 31 were $1.07 billion with unadvanced loan commitments totaling $1.3 billion.

Based in Georgetown, CFC currently is participating in development of residential-office complex on its land, between 29th and 30th Streets NW, just off of M Street. CFC will have expanded office facilities, a conference center and parking. A private developer is building rental units around a central plaza.